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By Dan Culloton | 06-08-2011 08:25 AM

The Problem with AIG

With a low price/book value, the reward for AIG stockholders could be attractive, but the franchise has been weakened, says Davis/Selected American manager Ken Feinberg.

Dan Culloton: One stock that perhaps I am sure you hear a lot about and that comes back maybe to haunt you sometimes is AIG. It's coming public again. Under what circumstances would you own it or would you own it at all again?

Ken Feinberg: It's a very good question. I always like to say, I've never heard of AIG, but that doesn't seem to pass muster. I was actually not in the meeting, but our firm did meet with the CEO when Goldman Sachs was taking the company around a few weeks ago, and it's an interesting risk-reward. We didn't buy any on the IPO or the secondary from the government, but the stated book value is about $46 a share, and there might be some additional value in the tax benefits that they haven't booked yet because no one knows how profitable the company will be, but some people think they could be worth another $5 or $6, and yet the stock came at about $29, and it's trading today at $27 and change. So, it's rare that you find companies trading at 60% of book value.

The issue, or some issues, there is that while the property-casualty industry is a very competitive industry, as you know. It's a very unattractive industry for most players, just because the agent or the broker tends to control the business, and it can get shopped around. So, the actual underwriter doesn't really have much franchise value there. They have skills in underwriting, but that's about all they can bring.

So, one of the issues is that while ... it's been difficult, the industry is actually reporting a lot of profits, and this year will be different because of the catastrophes. So, it's been an unusually profitable industry of late, except for AIG.

So, AIG was really the only company that had to strengthen their reserves by about $6 billion, at a time when almost every other company has been releasing reserves because claims have been settled for less than they had anticipated. So, if one wanted to be a little bit skeptical, one would say, why would this one company be all the way out here by themselves having to strengthen their reserves and everybody else is showing good earnings and releasing them.

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